March 27, 2013

Host: Ted Simons

Arizona Technology & Innovation: High Tech Tax Credit

The legislature is considering a bill that would give insurance companies tax credits for high tech investments in Arizona. Steve Zylstra, President and CEO of the Arizona Technology Council, will discuss the bill.

Steve Zylstra: What we're trying to do is create a venture capital fund that's focused on early stage investments in technology companies, and use sort of ingenious mechanism to capitalize the fund. Other states have done this. They've used insurance premium tax credits, in this case the insurance companies get a one-to-one tax credit for capitalizing the fund. Once the fund starts generating returns, first the state gets paid back in this case $50 million for the tax credits it put out, and then the insurance companies begin benefiting from the returns on the fund. And in addition to that, a percentage of the returns will be used to make the fund Evergreen.

Ted Simons: What kind of parameters are involved in terms of these investments?

Steve Zylstra: First of all, the legislation requires that the Arizona commerce authority, who administers this fund, hire an upper court fund manager to manage the fund and make the investments. That takes the politics out of this. So the state itself is not picking winners and losers. An experienced venture capitalist is doing that. Why would the state get involved in something like this? It turns out that while we do pretty well in the angel investment area, we have an angel investment tax credit, and we have a few venture funds in the later stage, this early stage capital issue is a problem. It's called the valley of death.

Ted Simons: Why? Why is it a problem?

Steve Zylstra: It's a problem all over the U.S. By the way, almost every other state in the country has created a fund like this. A state supported fund. Very often they simply appropriate the funds, sometimes they use the pension funds, and it's just one of the riskier phases of a company's continuum. And it's difficult to get investors to make investments at that stage. Yet that's exactly when the companies need it. They've already done the research, they've proven the science, they need funding to take that company forward.

Ted Simons: How much would this cost the state? In terms of revenue that might come into the state, what kind of projections?

Steve Zylstra: Initially it's a $50 million fund, it would be 10 million in 2014 , 20 million in 15' and 20 million in 16'. As I said, once the fund starts generating returns, the state gets paid back 100% for the investment it made.

Ted Simons: And this -- The idea is to prompt investment that would, wouldn't ordinarily happen?

Steve Zylstra: What's happening is I'll just give you a list, have you ever heard of soakie COM, view links, note haul?

Ted Simons: No.

Steve Zylstra: Probably not. Because those are companies that were born here but left because they couldn't get funding here. These are one of them, note haul won in shark tank. So these companies are moving out of Arizona, moving to California and Texas, Illinois, the East Coast, because they can't find early stage capital here. So we're losing the future income from those companies, as well as the job creation.

Ted Simons: OK. We had that high-tech investment tax credit bill over here. Let's talk about the high-tech sector in general. Still some traction? What's going on?

Steve Zylstra: I would say it's very healthy. There's been some indicators lately that Arizona has one of the hottest markets when it comes to tech jobs, according to dice. I see the industry picking up precipitously. I think that the economy is starting to improve overall, and the tech sector is always out in front of the rest of the economy. Even in the depths of the great recession-- In the depths of the great recession, unemployment in the tech sector was between 3-4%.

Ted Simons: You mentioned dice.com, a job search site, a Phoenix area, fourth in year-to-year job growth and listing and fourth in increased advertising. Salary, the a of Raj salary for the advertised jobs was $84,000.

That's more than double the average in Arizona. And in addition to that, you've seen a number of companies attracted here recently, you've seen GM is bringing an I.T. center here, ZAGdot was announced yesterday, bringing a couple here -- Expanding a company here from New York. Stealth software, thousand jobs, so things are picking up.

Ted Simons: It's one thing to say we're doing well, and they're picking up and we're gaining speed. But are we gaining speed and watching the San Franciscos, the San Diego, the newspapereds, the Charlottes, are they gaining as much speed are and still moving ahead of us?

Steve Zylstra: Well, California is struggling just because of the environment that it has there. Texas, the Austin is a very vibrant area, so we have plenty of competition around the country for tech companies and tech talent. But I would say that we've got the finest ecosystem for tech-based companies we've ever had in Arizona right now.

Ted Simons: Explain what that means.

Steve Zylstra: We have incubators, we have some of the tools that Governor Brewer and Andy Tobin have created in the last couple years to lower corporate incomes taxes, lower business property taxes, improve the angel investment tax credit, improve job training programs. Extend the net operating loss carry forward period. One of the best business climates in the country and it makes it very attractive for tech companies.